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Marine & Energy News Alert: Fifth Circuit Finds "Other Insurance" Provision Does Not Preclude $50 Million In Deepwater Horizon Coverage

November 25, 2015

On November 19, 2015, the United States Court of Appeals for the Fifth Circuit affirmed Judge Carl J. Barbier’s decision in Deepwater Horizon that an excess insurer’s “other insurance” provision was insufficient to withhold coverage pending enforcement of its insured’s contractual indemnification claim against a third-party. Liberty Insurance Underwriters, Inc. provided excess insurance to Cameron International Corporation, which manufactured and sold the blowout preventer used on the mobile offshore drilling unit DEEPWATER HORIZON, for potential losses associated with the blowout preventer.

BP contracted with Transocean, which owned the DEEPWATER HORIZON, to drill its Macondo well. Following the blowout, explosion, and subsequent oil spill, Cameron sought contractual indemnity from Transocean under the parties’ sales contract, and Transocean in turn sought contractual indemnity from BP pursuant to the parties’ drilling contract. Cameron moved for summary judgment against Transocean on its contractual indemnity claim while discussing possible settlement with BP. Before the Deepwater Horizon court could rule on Cameron’s motion for summary judgment, Cameron and BP reached a settlement resolving Cameron’s liability in exchange for $250 million contingent on Cameron’s insurers’ agreement to waive their subrogation rights against Transocean. Cameron turned to its many primary and excess insurers to fund the settlement. Despite being kept apprised of Cameron’s settlement negotiations, only Liberty objected to the settlement requiring waiver of subrogation and refused to contribute its $50 million share, which left a gap in settlement funding Cameron was forced to fill on its own. Cameron subsequently sued Liberty for breach of its insurance contract seeking $50 million in excess insurance coverage, attorney’s fees, and treble damages for “bad faith” under Chapter 541 of the Texas Insurance Code.

On cross-motions for summary judgment, the lower court granted Cameron’s $50 million breach of contract claim, denied Cameron’s request for attorney’s fees, and found in favor of Liberty on Cameron’s statutory “bad faith” claim. Cameron appealed the district court’s judgment against it on its claim under Chapter 541 of the Texas Insurance Code and on its claim for attorney’s fees. Liberty cross-appealed the district court’s judgment providing Cameron with $50 million in insurance coverage.

On appeal, Liberty argued that its Policy had not yet been triggered as a result of the “other insurance” provision, which provided that “[i]f other insurance applies to a ‘loss’ that is also covered by this policy, this policy will apply excess of such other insurance.” The Policy defined “other insurance” as “any type of self-insurance, indemnification or other mechanism by which an Insured arranges for funding of legal liabilities.” Specifically, Liberty argued that because Cameron had not yet exhausted its legal remedies against Transocean, “other insurance” – namely, Transocean’s indemnification – applied to the loss such that Liberty could not have breached its contract since coverage never attached in the first instance. Alternatively, Liberty argued Cameron forfeited its coverage by breaching the Policy’s subrogation clause in settling with BP. Cameron countered that the lower court properly decided the “other insurance” provision only applies if that “other insurance” actually and presently applies, and because Transocean refused to indemnify Cameron, no “other insurance” was available and Liberty was obligated to pay the Policy benefits.

The Fifth Circuit affirmed the district court’s decision by finding Cameron’s interpretation to be reasonable since Liberty’s reading would transform the “other insurance” clause from a protection against double-insuring into a clause that makes Liberty’s Policy one of last resort. Additionally, the “other insurance” clause did not expressly provide that Liberty’s Policy is excess even to “other insurance” that is uncollectible, and the Fifth Circuit refused to penalize Cameron for choosing to maintain a potential alternative source of protection for its loss by forcing it to exhaustively litigate other potential sources of coverage before recovering anything from Liberty. Finally, the Fifth Circuit held that Liberty, not Cameron, breached the contract first by wrongfully denying coverage and waived its rights under the subrogation clause before Cameron settled with BP.

With respect to Cameron’s statutory “bad faith” claim, the Fifth Circuit found prior case law was inconsistent on whether an insured must show an injury independent from the wrongfully denied policy benefits to recover under Chapter 541 of the Texas Insurance Code and certified that question to the Texas Supreme Court. Finally, the Fifth Circuit reversed the district court’s denial of Cameron’s motion for attorney’s fees in the litigation and remanded to the district court for a determination of the amount of those fees.

The case is In re Deepwater Horizon, No. 14-31321. A link to the Fifth Circuit’s decision is attached here.